return of premium

[Bucky]

Client has a long term care policy. Policy had a rider that stated after 10 years if the policy had not been used she would get back the premium. Well 10 years went by and after a few calls she gets a check for $19,329 and check stated return of premium. (policy still in force) My question is this taxable? There were a few years we were able to take this on medical as a deduction. What say you!

Thanks

Bucky

[Bucky]

I think I found my answer. Report as income line 21 any amount expense was deductible in an earlier year.

[Unregistered]

Please note that the policy was not a qualified policy and should never have been deducted as medical expense. From BNA:

C. Requirements for Qualified Status
Section 7702B defines a qualified long-term care insurance contract as an insurance contract that provides only coverage of qualified long-term care services and:

(1) is guaranteed renewable;
(2) does not provide for a cash surrender value or other money that can be paid, assigned, pledged or borrowed;
(3) under which refunds (other than refunds on the death of the insured or complete surrender or cancellation of the contract) and dividends may be used only to reduce future premiums or increase future benefits;
(4) generally does not pay or reimburse expenses reimbursible under Medicare (except where Medicare is a secondary payor); and
(5) satisfies the prescribed consumer protection provisions. 271
/Footnote/ 271See Regs. §1.7702B-1.

[Snaggletooth]

What If???

What if this had been a qualified policy? (I'm amazed at how insurance policies sell low-return investment under the guise of coverage, but that is another conversation).

As we all know, most deductible medical expense is wasted because of the 7.5% threshhold. Out of the $19K, ALL of this would be considered deductible assuming the policy was qualified. However let's presume the taxpayer was only able to use the benefit of $3K because of the 7.5% floor over the years.

My question: How much is taxable? The $19K or the $3K??

Thanks, Ron Jordan

[OldJack]

Please note that the policy was not a qualified policy and should never have been deducted as medical expense.

I agree, All premiums returned should be tax-free. The fact that there may have been prior year medical deductions is of no concern as the deductions were in error and the years involved are closed years.

[Unregistered]

What if this had been a qualified policy? (I'm amazed at how insurance policies sell low-return investment under the guise of coverage, but that is another conversation).

As we all know, most deductible medical expense is wasted because of the 7.5% threshhold. Out of the $19K, ALL of this would be considered deductible assuming the policy was qualified. However let's presume the taxpayer was only able to use the benefit of $3K because of the 7.5% floor over the years.

My question: How much is taxable? The $19K or the $3K??

Thanks, Ron Jordan

Tax benefit rule applies just like in most other cases.